Don't Live Beyond Your Means

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Credit.com

There are many different ways to use a credit card, but some behaviors may be putting consumers at greater financial risk than others.

Consumers who use their cards sparingly, such as in the event of a financial emergency or only to make larger purchases, will typically not face the same kinds of financial risks that those who use them to make everyday purchases will.

But in either of those cases, the key is responsibility when it comes to making payments every month. The more you are able to pay off, the better your financial situation because you will face less in interest payments down the road.

But one kind of credit card habit that can be seriously damaging to consumers’ finances and credit standing involves using their account to buy items they cannot afford. It can obviously be tempting to do this: Consumers may see an item they want to buy but know they don’t have the cash on hand to make such a purchase, and think that they can afford it if they put it on their credit card.

Suppose such an item costs $500, but the consumer can only afford to pay $100. That means they’re taking on $400 in debt to purchase it, simply because they want it. That might not seem like a lot in the scheme of things, but think about like this: That $400 will probably go unpaid for at least a month, and will therefore incur a bit of interest, especially if the consumer has a card with a large APR. In addition, that’s $400 on top of all the other purchases made on that credit card over the course of however long it takes to pay off.

As a consequence, that one purchase, which may not seem like it will have a big impact, can be the snowball that starts an avalanche. Consumers who use credit cards to live beyond their means may also get themselves into the habit of buying things they can’t afford with that account, and therefore quickly rack up thousands of dollars or more in debt.

A good rule of thumb for making purchases of this type is to simply ask, “Can I afford this, and do I need it?” If the answer to either question is no, purchasing it might not be a good idea.

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